To understand a pricing matrix, let’s do a quick craft project. Take a sheet of black paper. Draw a large square on the page. Now dissect that square in half with a vertical line in the middle of the square. Now bisect that square in half with a horizontal line in the middle of the square. You should now have four squares on your page. Label the x-axis (horizontal line) as quality. Label the y-axis (vertical line) as price. Label the square in the upper right corner as “Penetration.” Label the square in the lower right corner as “Premium.” Label the upper left corner “Economy.” Label the lower left corner “Skimming.” You have now created your own pricing matrix.
Economic price: low quality and low price. This would be the easy price, think of Wal-Mart or Southwest Airlines. Compare this to Nordstrom and First Class on Virgin Airlines.
Penetration prices: high quality and low price. This strategy involves initially setting a price below the market price in order to enter the market. Think back to when the Japanese initially introduced cars to the American market. They were cheaper cars, but with equal or better equality. Now Toyota is poised to become the number one selling automaker in the US.
Price skimming: low quality and high price. With this strategy, a company will set a relatively high price initially and then lower the price over time. Over time, they can get consumers at any price. The perfect example of this is Apple’s iPhone, which originally cost $ 499 when it was introduced. Apple now introduces the second version on July 11 at a price of $ 199.
Premium prices: high quality and high price. Every luxury brand follows this pricing strategy, which consists of keeping the price of a product or service high, so that buyers perceive it favorably as superior or exclusive. Think Coach or Bentley or even the Ritz Carlton.
How to use the matrix:
Step One: Determine where you are on the grid. You may have products or services that fall into one or more categories.
Step two: determine which quadrants your competitors fall into
Step Three: Determine the Gaps in the Market. Are you and your competitors in the premium and penetration quadrant? So there could be opportunities in the economy and skimming quadrants. What products or services could you introduce to take advantage of these “holes” in the market?
Step Four: Determine if you can have products or services that fit in all quadrants. For example, Toyota has a Toyota Corolla (Economy), a Prius (Skimming), and a Lexus (Premium).
How do you know if a change in the pricing strategy will be successful?
Well, you don’t know what is going to be successful. It’s best to do your research ahead of time before investing too much in a new pricing strategy, product, or service. The three most important questions are:
1. Is there a market for it?
2. How can I reach that market?
3. Do you have the talent and resources to reach that market?
So give your pricing strategy some thought. What is the cost of higher market share, more customers, higher revenue, and higher profits? Priceless.